Finance Glossary

A capital call (or drawdown) is a demand by a private equity fund to its limited partners (LPs) to contribute their portion of committed capital.

How It Works

When LPs commit to a fund, they don’t transfer all the money upfront. Instead:

1. LPs commit a certain amount (e.g., $10 million)
2. The General Partner (GP) calls capital as needed for investments
3. LPs have a limited time (typically 10-14 days) to wire the funds

Example

If you committed $10M to a fund and the GP issues a 20% capital call, you must send $2M within the notice period.

Why It Matters

Missing a capital call can result in:

• Dilution of your ownership stake
• Default penalties
• Potential legal action

In Capital Calls, the title refers both to this financial mechanism and the moral “calls” characters must answer.

Carried interest (or “carry”) is the share of investment profits that private equity fund managers receive as compensation.

The Standard Deal: 2 and 20

Most PE funds charge:

• 2% management fee (on committed capital)
• 20% carried interest (on profits above a hurdle rate)

Example

Fund invests $100M and returns $200M to LPs:

• Profit: $100M
• After 8% hurdle is cleared, GP gets 20% of profits = $20M
• LPs get remaining $80M in profit

The Tax Controversy

Carried interest is taxed as capital gains (often ~20%) rather than ordinary income (~37%), even though it’s compensation for labor.

Critics argue this is a loophole that allows billionaire fund managers to pay lower tax rates than their secretaries.

Why It Matters

In Capital Calls, carried interest represents the ultimate incentive structure—GPs are motivated to maximize returns, sometimes at the expense of long-term stability or ethical considerations.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a measure of a company’s operating performance.

Why Private Equity Uses It

EBITDA is the gold standard metric in private equity because it:

• Shows operating profitability without capital structure effects
• Enables comparison between companies with different debt levels
• Removes accounting differences (depreciation methods)

The Formula

Revenue - Operating Expenses = EBITDA

The Dark Side

EBITDA can be manipulated through:

• Aggressive revenue recognition
• Capitalizing expenses that should be expensed
• “Add-backs” for “one-time” costs that keep recurring

Private equity firms often tout “adjusted EBITDA” with questionable add-backs to inflate valuations.

A Leveraged Buyout (LBO) is the acquisition of a company using a significant amount of borrowed money (leverage) to meet the cost of acquisition.

How It Works

1. Private equity firm identifies target company
2. Borrows 60-90% of purchase price (using the target’s assets as collateral)
3. Contributes only 10-40% equity
4. Acquires the company
5. Loads the debt onto the target company’s balance sheet
6. Extracts value through management fees, dividends, and eventual sale

The Math

If you buy a $100M company with $30M equity and $70M debt, and sell it for $150M five years later:

• Return on your $30M: ~40% IRR
• But the company now carries $70M in debt it didn’t have before

The Controversy

Critics call it “asset stripping” because:

• The acquired company bears the debt burden
• Excessive leverage can lead to bankruptcy
• Jobs are often cut to service debt payments
• PE firms profit even if the company struggles

Supporters argue LBOs create value through operational improvements and better management.

A Total Return Swap (TRS) is a derivative contract where one party receives the total return of an asset while the other receives a fixed or floating payment.

Structure

Party A (Receiver):

• Gets all returns from an asset (dividends, interest, capital gains)
• Pays a fixed rate to Party B

Party B (Payer):

• Receives fixed payments
• Bears the economic risk/reward of the underlying asset

Why Use It?

TRS allows investors to:

• Gain exposure to assets without owning them
• Avoid disclosure requirements (the asset stays on someone else’s balance sheet)
• Leverage positions without direct borrowing
• Hide ownership from regulators and competitors

The Risk

If the underlying asset tanks, the receiver still owes the fixed payments while absorbing losses. TRS can amplify both gains and losses dramatically.

This opacity makes TRS popular in high-stakes financial maneuvering—and regulatory scrutiny.